Published: December 27, 2012 at 9:30 am

Herbalife Ltd. (NYSE:HLF) has fallen by more than 35% over the past week on news that billionaire investor Bill Ackman of Pershing Square Capital had a short position in the stock. After the announcement, Ackman also released a detailed 340-page analysis outlining various problems at the nutritional products company, namely calling it a “pyramid scheme.” Here’s Bill Ackman’s entire stock portfolio.

Assuming they still own the same number of shares that they held at the end of 3Q, there were quite a few big-name investors that lost money following Herbalife’s plunge, including Patrick McCormick of Tiger Consumer Management and Jim Simons of Renaissance Technologies (check out all of Jim Simons’ top picks).

Billionaire David Einhorn of Greenlight Capital also verbally questioned the company back in May of 2012, citing a lack of clarity related to Herbalife’s business model as a reason to be wary. The hedge fund manager jumped on Herbalife’s May 2012 earnings conference call and asked questions concerning the logic behind distributor disclosure, and metrics used to track performance. Whitney Tilson of T2 Partners has recently joined in on the Herbalife attacks, announcing a short position in the stock.

So what are the details of Ackman’s presentation?

First and foremost, Herbalife’s primarily function is marketing, and Ackman’s main accusation is that its business model is a pyramid scheme, which occurs when “participants obtain their monetary benefits primarily from recruitment rather than the sale of goods and services to consumers.” The SEC considers pyramid schemes fraudulent because they will eventually collapse, due to the fact that the money made at the top is a product of the losses made at the bottom. To be considered a pyramid scheme by the FTC, less than 50% of retail profits must be paid out in the form of recruiting rewards.

Ackman’s detailed presentation on Herbalife Ltd. (NYSE:HLF) outlines the fact that Herbalife does indeed pay more than 50% of its retail profits to recruiting, mainly driven by the fact that its “suggested retail price is an artificially inflated number with no relation to the price at which Herbalife’s products are actually sold to retail customers.” Allegedly, these numbers are overstated to conceal the fact that recruiting rewards well outpace the retail profit earned by Herbalife distributors.

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